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Saturday, October 6, 2012

The Role of JP Morgan Chase In Revolving Door and Political Economy


Orcun Kahyaoglu


JPMorgan Chase is one of the oldest, largest and best-known financial institutions in the world. The firm was chartered in New York City in 1799, and it was built on the foundation of more than 1200 predecessor institutions. Its major heritage firms are J.P. Morgan, Chase Manhattan, Chemical, Manufacturers Hanover and Bank One, First Chicago, and National Bank of Detroit. They were tied closely for innovations in finance and the growth of the United States and global economies. These firms also made significant contributions to their local communities. JP Morgan Chase was formed in 2000 with the merger of Chase Manhattan Corporation and J.P. Morgan & Co. In 2008, JPMorgan Chase & Co. acquired The Bear Stearns Companies Inc. and the deposits, assets and certain liabilities of Washington Mutual's banking operations. These acquisitions not only strengthened the firm’s capabilities across a broad range of businesses, including prime brokerage, cash clearing and energy trading globally, but also expanded its consumer branch network into California, Florida and Washington State and created the nation's second-largest branch network with locations reaching 42% of the U.S. population (JPMorgan Chase & Co.).

There are some facts that brought JP Morgan Chase into trouble. Issuing huge amounts of credit derivatives is one of the facts. Tett states in her book that JP Morgan did not invent credit derivatives, it was the first to “industrialize” them; mass-producing derivative deals which could cover large numbers of loans at once (2009, p.46). JP Morgan aimed to block regulatory capital requirements by issuing those credit derivatives. The company successfully convinced regulators that it could use credit derivatives to shift risk associated with the loans it made. Hence, it did not need to divide capital to cover losses in the event that borrowers defaulted. With credit derivatives, JP Morgan not only succeeded in shifting risks off its own books, but also created a rapidly expanding market, which raked in billions in fees for financial institutions (Tett, 2009). As a second fact, when Jamie Dimon became CEO of JP Morgan in 2006, he set the goal of diversifying its trading department into mortgage-backed securities, an area where his competitors were getting huge profits. By mid-2006, JP Morgan hired bankers to expand its CDO team and got to work. McLaughlin reported that in 2007 the number of subprime mortgages that JP Morgan Chase had originated jumped by 11% in first quarter of the year (2007). Eisinger & Bernstein argue that Magnetar which is a hedge fund that specialized in betting against the US mortgage market, JPMorgan Chase, and other financial institutions enabled the housing crisis to grow into a critical financial crisis by finding markets for risky assets, in spite of indications that there were problems in the housing market (2010).

In 2004, the bank agreed to buy Bank One, creating a $1.1 trillion bank holding company. JP Morgan Chase acquired Bear Stearns on March 18, 2008, for $10 per share. On September 25, 2008, the FDIC closed Washington Mutual, and the bank was sold to JPMorgan Chase for $1.9 billion (Cho & Irwin, 2008). JP Morgan's growing strategy, lead them to become a "too big to fail" bank, requiring government support during the financial crisis. On October 28, 2008 the Treasury Department started the Capital Purchase program; therefore, JP Morgan was among the eight large U.S. banks to receive the Treasury Department's initial round of capital investments and received $25 billion of TARP funds (ProPublica, 2012).

JP Morgan is always using its contacts to obtain government contracts. For example, the most recent one is that the bank has hired former U.S. Securities and Exchange Commission enforcement chief William McLucas to help respond to SEC’s investigations, enforcement actions, and regulatory probes of the firm’s $2 billion trading loss in May 2012. Stephen Cutler who is JPMorgan’s general counsel and most senior lawyer, also previously served as the head of enforcement at the SEC and worked with McLucas (Gallu & Kopecki, 2012). The Senate Banking Committee respond to JP Morgan’s loss in customer money because of a risky trading strategy. However the bank has already been ready for any action because the staff director for the Senate Banking Committee was Dwight Fettig who is a former J.P. Morgan lobbyist. He was hired to work on financial services regulatory reform and the Restoring American Financial Stability Act of 2009. He oversaw the hearings on J.P. Morgan’s risky proprietary trading and moving through the revolving door. K Street is the center of lobbying firms in Washington, DC. K Street lobbyists occupy some of the most important positions in Congress. In 2010 these lobbyists were hired by some Republicans in Congress as their chiefs of staff. Chairman Rep. Spencer Bachus commented about the recent trading loss of JP Morgan to the press and defended the bank’s decision. In addition, Senator Mark Warner is one the JP Morgan’s defenders in Capitol Hill invested the bank’s hedge fund, which was clashed by Dodd-Frank reforms on proprietary trading (Fang, 2012).
JP Morgan sends former government officials to lobby the regulators who are working on the rules for Dodd-Frank. The bank used its team that is included a former assistant secretary of the Treasury and a former official of the Fed for the discussions with Treasury officials and Fed officials. It is stated that the bank has at least 36 contacts with federal regulators since August 2010 (Khimm, 2012). 

There is also a revolving door between JP Morgan and House Finance Committee. The bank has three lobbyists who are serving in-house. Rick Lazio is the chief government relations of the bank served as a congressman from New York from 1993 to 2000, Tom Koonce is a lobbyist who was the legislative director for Brad Miller, and Bart Gordon who was a former Democratic congressman from Tennessee. In 2012 election period, JP Morgan has given $168,000 to members of the committee (Currier, 2012).

JP Morgan Chase predicted in 2010 that the newly Republican-controlled U.S. House will create conflict with the still-Democratic-controlled U.S. Senate to the point where progress on large legislation is completely failed, according to a confidential memorandum dated Nov. 3 and obtained by Open Secrets Blog (Wilson, 2010). In the memo it is speculated that the tax cuts signed into law by President George W. Bush will be extended for at least one year, questioning whether the administration can find support for extending only the tax breaks for middle-class filers. The memo generally does not provide deep detail of the JP Morgan Chase’s lobbying strategies, but it maintains the company will have “newfound opportunities to play a constructive role in the development of important public policies” (Wilson, 2010, para. 8). JPMorgan Chase has spent $5.8 million in 2009 to lobby the federal government. In 2010, the firm has spent $6.1 million, according to a Center for Responsive Politics analysis of lobbying reports.  Wilson also states that the JPMorgan Chase memo offers President Barack Obama some clear criticism, noting Obama will be under pressure to reach beyond the Congress and appeal directly to the American people for support. Going forward with the new 112th Congress, JPMorgan Chase concludes that the Obama administration will pursue less aggressive legislative goals at the same time it uses its regulatory powers to continue pushing its agenda.

JP Morgan gives money to the campaigns of the people on Senate Banking Committee. Moreover, the bank has been the second largest contributor to Senator Tim Johnson, Democrat, and the chairman of the committee. JP Morgan was also one of the biggest donors of both President Obama’s and John McCain’s campaign in 2008. Bill Moyers also stated that one of Senator Johnson's former staffers is now one of JPMorgan's chief lobbyists and the chairman's present top assistant used to be a lobbyist for a law firm that worked for JPMorgan. Based on the Federal Election Commission data released on September 2011, JP Morgan has contributed $808,799 to the Obama’s election campaign.

The CEO of JP Morgan, Dimon, had a few problems with new regulations in the Dodd-Frank financial reform bill, including the so-called Durbin amendment, which prevents banks from charging fees on debit card use. Until the recent trading loss of $2 billion, Dimon had been one of the most effective critics of the Dodd-Frank Act, but now he accepts the case for why limits on risky trades by big banks are needed (Schroeder, 2012).

To sum up, JP Morgan Chase is deeply integrated to the revolving door and the political economy of financial regulation issues. Its lobbying team, and in-committee and in-company lobbyists are always in contact with the federal regulators. By this way, it can receive funds from federal government in case of any need and control the contracts of regulators. Being the largest bank of the U.S., it has total assets of $2.2 trillion and such a huge amount requires huge connections. Although these kinds of relationships seem unethical, large-scale financial institutions have to have such connections in order to survive in the market.



Cho, D., & Irwin, N. (2008). The Washington Post. J.P. Morgan Raises Its Offer for Bear Stearns. Retrieved from: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/24/AR2008032400265.html

Currier, C. (2012). The revolving door between JPMorgan Chase and the House Finance Committee. Retrieved from: http://www.alaskadispatch.com/article/revolving-door-between-jpmorgan-chase-and-house-finance-committee

Eisinger, J. & Bernstein, J. (2010). The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going. Retrieved from: http://www.propublica.org/article/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going


Gallu, J., & Kopecki, D. (2012). Bloomberg. JPMorgan Hires Ex-Sec Enforcement Chief McLucas In Probes. Retrieved from: http://www.bloomberg.com/news/2012-05-22/jpmorgan-said-to-hire-ex-sec-enforcement-chief-mclucas.html

JPMorgan Chase & Co. (n.d.). History of Our Firm. Retrieved from: http://www.jpmorganchase.com/corporate/About-JPMC/jpmorgan-history.htm

Khimm, S. (2012). The Washington Post. How JPMorgan Exploits Washington’s Revolving Door. Retrieved form: http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/06/21/how-jpmorgan-exploits-washingtons-revolving-door/

McLaughlin, T. (2007). Reuters. JPMorgan Quietly Climbs Subprime Ladder. Retrieved from: http://www.reuters.com/article/2007/06/01/idUSN3041717020070601

ProPublica. (2012). Capital Purchase Program. The ‘Healthy Bank’ Program. Retrieved from: http://projects.propublica.org/bailout/programs/1-capital-purchase-program

Schroeder, P. (2012). JPMorgan mess could strengthen Democrat efforts with Dodd-Frank. Retrieved from: http://thehill.com/blogs/on-the-money/banking-financial-institutions/226983-jp-morgan-mess-boosts-dems-efforts-with-dodd-frank
 
Tett, G. (2009). Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. New York: Free Press

Wilson, M. R. (2010). EXCLUSIVE: Confidential JPMorgan Chase Memo Predicts Congressional                  

             'Gridlock'. Retrieved from: http://www.opensecrets.org/news/2010/11/confidential-jpmorgan-    
             chase.html

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